U.S. judge questions Republican challenge to pay-to-play rule

WASHINGTON (Reuters) - A U.S. district judge questioned on Friday whether two state Republican parties have legal standing to challenge a U.S. Securities and Exchange Commission rule that puts some restrictions on asset managers when they make campaign contributions.

The New York and Tennessee Republican parties filed a lawsuit against the SEC in August over the 2010 rule, arguing that it impedes free speech. They are seeking a preliminary injunction against the rule.

Campaign contributions from the asset management industry have traditionally been an important source of funds for political parties. The lawsuit comes just a few months before the 2014 midterm elections, in which Republicans are hoping to regain control of the U.S. Senate.

The SEC’s pay-to-play rule intends to prevent a quid pro quo between elected officials and investment advisers who are seeking to win business to manage public assets, such as pension plans. It prohibits advisers from receiving compensation for asset management services for two years after making a campaign contribution to public officials or candidates in a position to award contracts.

In their complaint, the Republicans argue that “potential donors” have informed them that “they will not make any political contributions because of the SEC’s rule.”

But in a series of tough questions, U.S. District Judge Beryl Howell questioned whether the parties have standing to bring the case, noting they failed to name the potential donors and did not cite any investment advisers who are upset about the rule.

She also said she was skeptical about whether the district court has jurisdiction to hear the case, and at times criticized the Republicans for failing to provide more facts to back up their complaint and for filing briefs with some discrepancies.

Jason Torchinsky, an attorney for the Republican parties, said the judge could assume the unnamed potential donors cited in the complaint are investment advisers.

He also cited several local candidates who he said were harmed by the rule, including New York State Senate Republican Lee Zeldin and Tennessee State Senate Republican Jim Tracy. Both are running for U.S. Congress.

An SEC lawyer, Jeffrey Berger, argued that the Republicans missed a 60-day statutory deadline to challenge the rule after it was adopted in 2010 and that only the U.S. appeals court, not the lower court, can hear the matter.

Berger also took issue with whether the Republicans have legal standing, saying they were hinging their case on “third parties” who are “unidentified” and failing to provide direct evidence that contributions have dropped because of the rule.

“That is a flaw that runs throughout all of their standing theories,” Berger said.